What Is A High Interest Coverage Ratio?

Is it good to have a high interest coverage ratio?

The lower the interest coverage ratio, the higher the company’s debt burden and the greater the possibility of bankruptcy or default.

A higher ratio indicates a better financial health as it means that the company is more capable to meeting its interest obligations from operating earnings..

What is a good current ratio?

A good current ratio is between 1.2 to 2, which means that the business has 2 times more current assets than liabilities to covers its debts. A current ratio below 1 means that the company doesn’t have enough liquid assets to cover its short-term liabilities.

What is a good gearing ratio?

A gearing ratio higher than 50% is typically considered highly levered or geared. … A gearing ratio lower than 25% is typically considered low-risk by both investors and lenders. A gearing ratio between 25% and 50% is typically considered optimal or normal for well-established companies.

What is a bad interest coverage ratio?

A bad interest coverage ratio is any number below 1, as this translates to the company’s current earnings being insufficient to service its outstanding debt.

Is a higher or lower interest coverage ratio better?

Also called the times-interest-earned ratio, this ratio is used by creditors and prospective lenders to assess the risk of lending capital to a firm. A higher coverage ratio is better, although the ideal ratio may vary by industry.

Is interest coverage ratio a liquidity ratio?

The interest coverage ratio is a financial ratio that measures a company’s ability to make interest payments on its debt in a timely manner. Unlike the debt service coverage ratio, this liquidity ratio really has nothing to do with being able to make principle payments on the debt itself.

What is a good quick ratio?

A result of 1 is considered to be the normal quick ratio. … A company that has a quick ratio of less than 1 may not be able to fully pay off its current liabilities in the short term, while a company having a quick ratio higher than 1 can instantly get rid of its current liabilities.

What is a good debt/equity ratio?

2.0The optimal debt-to-equity ratio will tend to vary widely by industry, but the general consensus is that it should not be above a level of 2.0. While some very large companies in fixed asset-heavy industries (such as mining or manufacturing) may have ratios higher than 2, these are the exception rather than the rule.

What does debt to Ebitda tell you?

Debt/EBITDA—earnings before interest, taxes, depreciation, and amortization—is a ratio measuring the amount of income generated and available to pay down debt before covering interest, taxes, depreciation, and amortization expenses. Debt/EBITDA measures a company’s ability to pay off its incurred debt.

How do you increase interest coverage ratio?

Here are a few ways to increase your debt service coverage ratio:Increase your net operating income.Decrease your operating expenses.Pay off some of your existing debt.Decrease your borrowing amount.

What is a good Ebitda to interest ratio?

It can be used to measure a company’s ability to meet its interest expenses. However, EBITDA is typically seen as a better proxy for the operating cash flow of a company. When the ratio is equal to 1.0, it means that the company is generating only enough earnings to cover the interest payment of the company for 1 year.

What is asset coverage ratio?

The asset coverage ratio is a financial metric that measures how well a company can repay its debts by selling or liquidating its assets. The asset coverage ratio is important because it helps lenders, investors, and analysts measure the financial solvency of a company.

What does debt service coverage ratio mean?

In the context of corporate finance, the debt-service coverage ratio (DSCR) is a measurement of a firm’s available cash flow to pay current debt obligations. The DSCR shows investors whether a company has enough income to pay its debts.

Does interest coverage ratio include depreciation?

Summary – Interest Coverage Ratio It is calculated by dividing earnings before interest, taxes, depreciation and amortization by the total interest paid. The higher the ratio the more likely management can pay interest and the corresponding debt principal payments (debt service).

How do you interpret interest coverage ratio?

Intuitively, a lower ratio indicates that less operating profits are available to meet interest payments and that the company is more vulnerable to volatile interest rates. Therefore, a higher interest coverage ratio indicates stronger financial health – the company is more capable of meeting interest obligations.

What does a high interest cover mean?

The interest coverage ratio measures the ability of a company to pay the interest on its outstanding debt. … A high ratio indicates that a company can pay for its interest expense several times over, while a low ratio is a strong indicator that a company may default on its loan payments.

What does the cash ratio tell you?

The cash ratio is a measurement of a company’s liquidity, specifically the ratio of a company’s total cash and cash equivalents to its current liabilities. The metric calculates a company’s ability to repay its short-term debt with cash or near-cash resources, such as easily marketable securities.